Gold exchange traded funds zoom in FY12

Indian investors are increasingly flocking to paper gold or gold exchange-traded funds (ETFs). According to the latest data released by the Association of Mutual Funds in India (Amfi), assets under management (AUMs) under gold ETFs have more than doubled to Rs 9,886 crore as on March 31, 2012, from Rs 4,400 crore reported in March 2011, showing a year-on-year growth of 124 per cent.

Also, the share of gold ETFs to total AUMs rose to two per cent from one per cent last year. However, Amfi data showed total AUMs had declined 0.84 per cent for the year ended March 2012 at Rs 587,217 crore, as against Rs 592,250 crore last year.

Experts attributed the sharp growth in AUMs of gold ETFs to the increased awareness among retail investors about the convenience of paper golds as well as more companies offering gold ETF schemes for investments.

MOVING ON

As on March 31 2011 (Rs cr)

As on March 31 2012 (Rs cr)

Growth (%)

Gold ETFs

4,400

9,886

124

Total AUMs

592,250

587,217

-0.84

"India is a natural buyer of gold. Now, retail investors have an option to buy gold in smaller units, like one gram, without bothering about its storage and safety. So, ETFs have become a preferred asset class for gold investments. We can see increased participation coming in from Tier-2 and Tier-3 cities as well," said Chirag Mehta, fund manager at Quantum Gold ETF.

Quantum Asset Management Company had assets worth Rs 51.69 crore as on March 31, 2012 under Gold ETFs, which have yielded 34.9 per cent returns over the past one year. Since inception in 2008, the Quantum Gold ETF has yielded 22.4 per cent on a compounded annual growth rate (CAGR) basis.

According to Mehta, returns from gold ETFs have been almost in line with that of investments in physical gold.

The net inflow in gold ETFs during March 2012 has increased to Rs 91 crore, higher in comparison to the first two months of the last quarter of fiscal 2012. In February 2012, total assets under gold ETFs was Rs 9,795 crore.

"There is an increasing interest coming from small investors for gold ETF investments, mainly because it has smaller denominations like one gram. The scene was poor a couple of years back. But now gold ETFs have become a preferred investment class for retail investors, even for housewives. In the coming days, you will find gold ETF investments surpassing even physical gold investments," said Prithiraj Kothari of Riddi Siddhi Bullions Ltd (RSBL), one of the largest bullion traders in India.

Recently, Motilal Oswal AMC had launched a gold ETF scheme with an option for physical delivery.

"We had launched this product in March this year and we have seen robust response from the retail investors. Last week, we also made a first physical delivery of gold against the ETF. This benefits the real consumers to lock their purchase price of gold and take delivery at a later date, when required," informed Nitin Rakesh, managing director and chief executive officer, Motilal Oswal AMC.

However, the minimum quantity required for delivery is 10g of gold and to take a physical delivery, an investor would have to shell out a few extra bucks towards vault charges, he added.

"Ashok Dhamnaskar, an investor from Mumbai, has become the first investor to convert gold ETF units to physical gold on Thursday, April 12, 2012. We currently have four delivery centers each at Ahmedabad, Mumbai, Bangalore and Hyderabad. Soon, we will have delivery centers in 22 cities across India," said Rakesh.

"There is a need for product innovation in Gold ETFs, which can potentially attract more retail investors over a period of time. There is also a need for other commodities like silver to be allowed for ETFs," said Kothari, who is also president of the Bombay Bullion Association.

Currently, there are 15 companies offering gold ETFs in India, including Motilal Oswal AMC. ETFs are traded on the stock exchange and are similar to a share of a company.